Ban Carbon Emissions, Don’t Price them: Why Cap and Dividend is the Best Approach

by Cliff Stainsby

First in a series on climate policy

The current debate over carbon taxes versus “Cap and Trade” is wrongheaded on two counts; (1) it treats global warming as an economic issue, and (2) neither carbon taxes nor  “Cap and Trade” will solve the problem.

There is a solution that does work and which is rapidly gaining public support once understood-the ‘Cap and Dividend’ system (which I describe below).

But first we must see what is wrong with the current approach.

The proper way to eliminate toxic substances is to ban them. One’s income – ability to pay a tax – shouldn’t determine one’s right to poison the environment. Dealing with toxins is not a matter for economics and the market. Toxic substances, such as DDT, PCBs, and Dioxins, are properly dealt with by prohibiting their use. And, frequently, that is exactly what has been done.

We have now reached the point where man-made Carbon Dioxide (CO₂) emissions are toxic. Our environment is already overloaded with CO₂, the major cause of global warming. Adding more CO₂ threatens civilization.

Time is of the essence. Scientists believe we have already ‘overshot’ safe levels. To stabilize global temperatures below dangerous levels (widely considered to be 2⁰C above pre-industrial levels) we need to reduce atmospheric CO₂ concentrations from the current 385ppm (parts per million) to 350ppm or lower. In other words, current levels of greenhouse gases in the atmosphere are much higher than safety permits. Thus, current CO₂ emissions are toxic.

Yet, CO₂ emissions continue to increase. Since 2000 emissions per year have been increasing more than three times faster than in the 1990s.

There is no avoiding it; we must ban CO₂ emissions. (Other greenhouse gas emissions must be eliminated too, most notably nitrous oxide (N₂O) and methane (CH₄). For simplicity’s sake, from here on I will use CO₂ as a surrogate for all greenhouse gases.)

Ordinarily we could rely on our oceans, forests and soils (‘natural greenhouse gas sinks’) to keep atmospheric greenhouse gases in balance and temperatures within a safe range. Unfortunately, these sinks are being overwhelmed rapidly by increasing greenhouse gas concentrations in the atmosphere and are no longer up to the task. Furthermore, atmospheric CO₂ is increasing ocean acidity threatening marine life, the basis of much of our life support system.

Our civilization must be quickly weaned off the fossil fuels on which it was built; the scientific evidence suggests by no later than 2050, and sooner is better.

The overarching question for humanity today – what is the best way to eliminate CO₂ emissions quickly?

A greenhouse gas-banning plan must meet 5 criteria. It must:

1. Scale – be able to eliminate all greenhouse gas emissions;
2. Urgency – be able to eliminate all emissions by 2050, at the latest;
3. Certainty – provide certainty in reducing emissions; we no longer have time to fiddle with carbon taxes until we find a tax-level that achieves the required reductions;
4. Simple and transparent – be understandable to everyone and easily audited; and importantly
5. Fairness – be fair, particularly to those least able to adapt to change.

Carbon taxes fail these criteria miserably. They cannot respond to the required emissions reduction urgency, they do not provide reductions certainty, and if manipulated to be fair in today’s almost incomprehensibly complex economic context, will fail the simplicity and transparency test.

Furthermore, a carbon tax that addresses the scale of the problem is not politically palatable, witness the sustained attack on the puny, ineffective, Liberal carbon tax in BC and the ease with which the carbon tax proposed by the Federal Liberals was turned against them in the last Federal election. In neither of these proposals were the carbon tax rates within an order of magnitude of those required to address the scale of the emissions reduction problem.

And, even if such a tax rate were proposed, it would not provide the certainty required as the emission reduction response to any particular tax rate is highly speculative and would change as economic circumstances change, for example in times of recession versus times of prosperity.

If it weren’t for the fact that society is in thrall to economics, the inability of carbon taxes to address global warming should not be of much concern because, as noted earlier, this is not fundamentally an issue of economics, markets, or supply and demand. Some issues, including those of global warming and the release of toxic greenhouse gases into the environment, are moral issues, matters of right and wrong. Allowing global warming to persist would be
a wrong of epic proportions. It would continue the destruction of lives in the sub-tropics and tropics that are already being devastated by floods, droughts and storms.

Failure to eliminate greenhouse gas emissions will also devastate future generations whose prospects grow dimmer with each molecule of greenhouse gas we cast skyward.

Compounding the immorality of continued greenhouse gas emissions is the fact that the majority of sufferers are not the historical large emitters. Most of the billions of people in the tropical and sub tropical regions have an almost infinitesimally small responsibility for the current global warming problem, and future generations bear no responsibility whatsoever for the disaster and hard times they stand to inherit.

Economics and economists do bear a significant share of the blame for our global warming problem (eg. their silly myths of sustainable growth and infinite resource substitution on a planet fixed in size and resource endowments), but really have very little to offer by way of solutions. Except in the vastly under populated discipline of ecological economics, there is no meaningful connection in economic theory between the economy and markets and the real biological/physical world we live in. Where such connections are claimed, they are generally through rather pathetic and utterly inappropriate attempts to apply dollar values to ‘ecosystems services’ and the biosphere.

There are, of course, no human made substitutes for our physical and biological life support systems and there is no dollar value equal to life on earth. Healthy air, clean and plentiful water, healthy and abundant soils, and functioning ecosystems are a natural endowment, not an economic construct. What sense could it possibly make to trade sustainability for dollars? What use does a planet devoid of civilization have for dollars to spend? What dollar value have our children and grandchildren? How about the millions of other species with whom we share this planet?

We must regulate the elimination of greenhouse gases just as – actually much more effectively than – we do other toxic chemicals. Regulation, unlike taxes, can be based on our collective morality and values and on the best available scientific information about our planet – in this case, information about global warming.

Our values, I hope, place the highest importance on the well being of all peoples on earth, whatever their location and circumstances, and on future generations. Our global warming regulations ought to reflect those values. If they do, we will reduce greenhouse gas emissions massively, quickly and with certainty.

Because elimination of greenhouse gas emissions is, unfortunately, not possible overnight, we must regulate their elimination over time.

Caps on carbon emissions are a regulatory approach and, in effect, are a way of saying ‘one may not emit’ greenhouse gases, unlike carbon taxes which, in effect, say ‘one may emit greenhouse gases if one can afford to pay the tax’; thus under a carbon tax regime the well off can continue emitting. However, adding ‘Trade’ to the ‘Cap’, to create ‘Cap and Trade’, once again creates a market and an inappropriate response.

More important in the short run is the fact that “Cap and Trade” schemes also fail to meet the five criteria. They tend to be anything but simple and transparent, they will be difficult to implement quickly in order to meet the urgency criteria, and they set up a fierce and bitter struggle between interests and sectors over which must be capped, and at what levels, and whether permits will be grandfathered, auctioned or whether some mix of auction and grandfathering applied. Debates also arise as to what the trade rules should be.

Combining a “Cap and Trade” regime with a carbon tax regime merely increases the battles and the confusion. And, sorting this out would take time, which means the urgency test is failed. These approaches remind one of the current financial debacle which no one, not even the ‘experts’, seems to understand fully because the contributing rules of finance, if there were any, were complicated and obscure.

Making a “Cap and Trade” system fair would require considerable regulatory and economic complexity, making satisfaction of the fairness and simplicity and transparency criteria difficult or uncertain. And, unless the Cap is applied at the source of the emissions, achieving the required scale of reductions will, also, not be achieved.

Neither a carbon tax nor “Cap and Trade” meet the five criteria. Fortunately, there is one proposal that does; it is called ‘Cap and Dividend’.

The Cap and Dividend “policy has three basic steps:

        First, … carbon emissions are capped at a level that gradually declines over time.

        Second, based on the Cap in a given year, permits are auctioned to firms that bring fossil carbon into the economy (whether through domestic extraction or imports). The supply of permits in a given year is fixed by the cap; their price depends on the demand for them.

        Third, revenue from the sale of permits is deposited into a trust fund and paid out equally to every woman, man, and child in the country. In addition, some fraction of the revenue initially may be earmarked for other uses, such as transitional adjustment assistance.

Cap and Dividend will work because it fulfills all the criteria:

1. Scale:  it caps all CO₂ emissions at the point they enter the economy – the oil and gas wells, the coalmines, and the border. Consequently there are very few emissions sites to monitor and enforce, and the emissions are well known.
2. Urgency: it can respond to the urgency because caps are required at relatively few sites.
3. Certainty:  a legislated enforceable cap can provide emission reduction certainty, and an easy to determine path from today to zero emissions in 2050. (Unlike carbon taxes for which no one can guarantee the emission reductions that will result from any particular specified tax rate.)
4. Simple and transparent: the plan is straightforward; all the elements – cap, auction, and dividends – can easily be made public and audited.
5. Fairness: the dividend ensures that low-income people receive protection from increased energy costs.

Public support for Cap and Dividend  is building. The “Cap and Dividend Act 2009” is being submitted to the US Congress and a massive public campaign is underway to support it. (Details of the proposal can be found at http://www.capanddividend.org/)

If we are serious about addressing global warming we too will push for a similar, simple, fair, effective Bill in BC and Canada.